Friday, April 30, 2010

WSJ: "More homeowners are willing to walk away from their homes voluntarily, according to new research released by the University of Chicago and Northwestern University. About 31% of foreclosures in March were considered “strategic defaults,” in which homeowners walk away when the value of a mortgage exceeds the house value — even if they can afford the mortgage. That’s up from 22% in March 2009."

Of course this is the day after I say in class that not as many strategic defaults as we would expect from a strictly economic/rational model.

Tuesday, April 27, 2010

"Fox: The book is really more about our collective irrationality, because I think there were arguments for years that obviously lots of individuals behave irrationally, but there was this theory that you bring 'em all together and you throw in a bunch of smart hedge fund managers, and markets come up with pretty, financial markets come up with pretty rational results. And my book is saying no, actually they don't.

Radke: Yes, yes, so then I mentioned Congress is considering financial regulation right now. If markets are irrational, where does that mean you stand on this financial regulation debate?

Fox: Well yeah, on the one level that's clearly that's an argument for regulation, that markets overshoot, overdo it, have booms and busts. But if markets are irrational, government regulators presumably are, too."

Thursday, April 22, 2010

"Obama will list five main areas of concern include a ban on banks engaging in proprietary trading, a system for winding down large firms whose failure could disrupt markets, transparency for derivatives, strong consumer protections and a provision giving shareholders more say on executive pay."

Tuesday, April 20, 2010

"...That's what happened in the Goldman deal, which was created using a package comprised of various credit default swaps. Investors like Paulson were then able to take the short side of the deal by buying insurance on the bonds referenced in the deal.

In turn, the long investors were the insurers. They received regular payments, much in the same way insurance providers do, from policyholders like Paulson. These payments were much like the interest they would accumulate had they actually owned the bonds outright. In exchange, they agreed to make large payouts to the short investors should the bonds fail, which is exactly what happened.

During the downturn, Goldman was hardly the only firm that allowed investors to employ these naked credit default swaps. In fact, naked shorts are viewed by many as one of the prime reasons why the housing collapse was so painful. "The naked CDS... wreaked havoc on the market," says Greenberger."

Note to class: do not be surprised if I ask you to explain the risk profile of a Credit Default Swaps or CDOs on the final. If this undergrad from Harvard did it, so too should you!

"...Goldman co-general counsel Greg Palm gave the company's most detailed rebuttal to date of the SEC charges. After an opening statement that mirrored the bank's previous comments, Palm took questions for nearly an hour in an exchange dominated by analyst' interest in the fraud charges.

Palm was asked why Goldman Sachs did not disclose to shareholders that it had been served with a Wells notice about the SEC's investigation of a transaction involving collateralized debt obligations, or CDOs. A Wells notice is a letter describing potential charges against a company and requesting a response.

Palm said the company does not report to shareholders every time it receives a Wells notice. "We just disclose it if we consider it to be material."

Monday, April 19, 2010

"Richard Fuld, the former chief executive officer of defunct Lehman Brothers Holdings Inc., said the Wall Street firm reported certain repo transactions as sales because accounting rules required it to do so.“Lehman should not be criticized for complying with the applicable accounting standards,” Fuld said in the prepared text of testimony to be presented to Congress tomorrow."

"The reporting system would work by assigning a unique identification number to large traders that would be available to their broker/dealers, who in turn would report trading information to the SEC upon request as early as the morning of the first business day after a trade is made.

“This rule would give us prompt access to trading information from large traders so we can better analyze the data and investigate potentially illegal trading activity,” said SEC Chairman Mary Schapiro."

"Neuroscientists like Dr. Brian Knutson, a professor at Stanford University, have found that your dopamine levels become elevated when you anticipate a large, uncertain financial gain. Scientific studies have also shown that the more surprised you are by a financial gain the bigger your dopamine rush.

Like a primitive hunter looking for food or a drug addict looking for a fix, this emotional high reinforces your risk-taking behavior, which can cause you to make irrational financial decisions. This explains why some people love to gamble, even if the odds of winning are next to none. It also helps explain why investors experience behavioral biases, like positive feedback loops and are willing to take more investment risk towards the end of a bull market."

Monday, April 12, 2010

I generally will just not comment on something I disagree with rather than give it more attention, but this one I have to call out. It is from the Guardian.

And I have to take exception. But first here is the comment:

"The good news is that the Obama administration and Congress is set to regulate the rating agencies through financial regulatory reform legislation currently pending in Congress. The Senate bill would create an Office of Credit Ratings at the SEC to watch the agencies and the office would have the power to shut down agencies that continue to make mistakes. The House bill would create liability windows for investors to file lawsuits whereby suitors would only have to prove 'gross negligence' rather than 'actual malice'.

However, neither bill changes the 'issuer-pay' model for compensating agencies that is rife with conflicts of interest. Neither bill deals with the competition problem: the big three rating agencies' stronghold on the market will hold. Perhaps most concerning is the fact that there is much less in these bills about how government debt ratings should be regulated."

Maybe I have read Atlas Shrugged too many times, maybe I am too cynical, but I do not see this as good news. I m not sure why this is good news. True the rating agencies have messed up. But so what? Ignore them. Why pay attention to them. A good investor will due his/her own analysis and not rely on a rating agency.

Moreover, with regulation, it seems to me that the conflict of interest is MUCH greater ("if you downgrade US debt, we close you down."

"We assess the impact of bank deregulation on the distribution of income in the United States. From the 1970s through the 1990s, most states removed restrictions on intrastate branching, which intensified bank competition and improved bank performance. Exploiting the cross-state, cross-time variation in the timing of branch deregulation, we find that deregulation materially tightened the distribution of income by boosting incomes in the lower part of the income distribution while having little impact on incomes above the median. Bank deregulation tightened the distribution of income by increasing the relative wage rates and working hours of unskilled workers."

Local Dividend Clienteles: We mention both ownership biases (similar to home country biases) as well as the dividend clientele effect in class, but I never suspected a relation strong enough to tie the two together, until now.

In an upcoming Journal of Finance article, Bo Becker, Zoran Ivkovic, and Scott Weisbenner do just that! They find:

"Firms headquartered in areas in which seniors constitute a large fraction of the population are more likely to pay dividends, initiate dividends, and have higher dividend yields."

"[A] new study that provides yet more evidence that most mutual fund investors would fare better if they didn’t try to time the market. And because so many fund investors try to do so anyway, the study suggests that these fund flows provide a new sentiment indicator for gauging excessive pessimism or optimism.

The new study, “Measuring Investor Sentiment With Mutual Fund Flows,” is forthcoming in the Journal of Financial Economics, an academic publication. Its authors are Avi Wohl, a finance professor at Tel Aviv University; Azi Ben-Rephael, a Ph. D. student there; and Shmuel Kandel, now deceased,.....

the average mutual fund investor would be far better off if he never engaged in stock market timing.

Still, the research also shows how we might become better market timers. The key is to do the opposite of what the average mutual fund investor is doing — in other words, to become a contrarian."

Friday, April 09, 2010

"Joel Stern, chief executive of management-consulting firm Stern Stewart & Co. Stern teaches theory and policy of modern finance at Columbia and is the developer of the 'economic value added' measure of performance, which seeks to filter out extraneous variables when evaluating business results.

A better solution, he says, is a 'bonus bank,' in which an employer deposits an award and pays out a third of the bank balance each year that performance goals are met, starting with the first year."

"Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Bank of America and Citigroup are the big names among 18 banks revealed by data from the Federal Reserve Bank of New York to be hiding their risk levels in the past five quarters ....The Federal Reserve’s data shows that, in the middle of successive quarters, when debt levels are not in the public domain, that banks would acknowledge debt levels higher by an average of 42 percent, The Journal says.

“You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you’re taking less risk,” William Tanona, a former Goldman analyst and current head of U.S. financials research at Collins Stewart, told The Journal."

..."profits rose 4% since 2008: New or refurbished stadiums opened in cities like New York and Kansas City, pushing league revenue up 1.4% to $5.9 billion. The other reason: Owners have become more prudent with spending on players."

Of course at the Top were the Yankees and the Red Sox. And the Mets fell in value even though they had a have a new stadium.

As a result Forbes estimates the Yankees are worth $1.6 B. The Mets? roughly half of that. :(

I confess it is probably not the most informative article of all time, but is good to see most teams (all but 2) were making money. Now if the Mets could just make some more wins!

Wednesday, April 07, 2010

"We document that firms with characteristics indicating low power to bargain for favorable terms in a takeover, but also indicating high potential agency costs, have more antitakeover provisions in place. We also find that for these firms, Tobin’s Q increases in the number of adopted provisions. These findings are robust to several methods that control for endogeneity. Our evidence suggests that adopting more antitakeover provisions is beneficial for certain firms and challenges the commonplace view that antitakeover provisions are universally harmful for shareholders."

Saturday, April 03, 2010

"According to “Reaching for the Stars: The Appointment of Celebrities to Corporate Boards”, a new study by four American-based economists, simply announcing that a celebrity is joining a board gives the company’s share price a boost. Disney’s share price jumped by 4.2% on the day Mr Poitier was appointed. But, for the more than 700 celebrity director appointments (out of over 70,000 board appointments in all) that the study examines during 1985-2006, the firms’ shares continued to outperform significantly over the subsequent one, two and three years.

Why is this? In some cases—a former president, say—powerful connections and the ability to open the right doors were surely a factor.....the economists point to the “visibility effect”—that appointing a celebrity helps draw the attention of investors to a company which, all else being equal, increases demand for its shares and thus its share price."

"...of course, another dynamic at play here: the thrill of speed and the allure of time savings.

None of the papers I’ve seen have calculated the economic benefits we derive from going faster, in large part because they vary so widely. (Benefit of high speed limit to driver on lonely rural highway: potentially large. Benefit to driver on congested urban freeway: zero).

But nevertheless the benefits are there. If cancer researchers can save a few minutes a day on their commutes, some of that time will go to finding a cure for a dreaded disease.

Plus, going faster is fun."

Again, as we mention in class so often, remember that people make decisions based on utility, not just risk and return as quantified by dollars and cents.

"There has never been a woman chief executive of a major Wall Street securities firm, and there is unlikely to be one anytime soon. The number of senior women executives in finance has always been small and the financial crisis has pared their ranks further. Among the most prominent casualties was Erin Callan, the eminently unqualified chief financial officer of Lehman Brothers during the first six months of 2008 until she was fired by the company’s chief executive, Dick Fuld."

"Among the report's most disturbing revelations, according to Wharton finance professor Richard J. Herring, is the picture of Lehman's accountants at Ernst & Young. 'Their main role was to help the firm misrepresent its actual position to the public,' Herring says, noting that reforms after the Enron collapse of 2001 have apparently failed to make accountants the watchdogs they should be.

'It was clearly a dodge.... to circumvent the rules, to try to move things off the balance sheet,' says Wharton accounting professor professor Brian J. Bushee, referring to Lehman's Repo 105 transactions. 'Usually, in these kinds of situations I try to find some silver lining for the company, to say that there are some legitimate reasons to do this.... But it clearly was to get assets off the balance sheet.'"